The world of entertainment has been undergoing an incredible change in the last decade because seismic shifts in technology have allowed numerous disruptors to enter the market. Companies such as Netflix, Amazon, Apple and others have made big Hollywood studios, TV networks and other traditional media outlets rethink how they approach the idea of success. Rahul Telang, professor of information systems and management at Carnegie Mellon University in Pittsburgh, and Michael D. Smith, professor of information systems and marketing at Carnegie Mellon, address this shift in their recent book, Streaming, Sharing, Stealing: Big Data and the Future of Entertainment. Telang recently appeared on the Knowledge@Wharton show, part of Wharton Business Radio on SiriusXM channel 111 to discuss where the industry is heading.

An edited transcript of the conversation follows.

Knowledge@Wharton: It has been crazy how this industry has shifted so much in the last 10 to 15 years.

Rahul Telang: Totally. One of the terms that we use in the book to describe it is the perfect storm. Over the last 10 years with the growth of internet and broadband, which brought piracy, the studios’ and the labels’ and the publishers’ abilities to control the content diminished significantly. It led to the growth of retailers like Amazon that now have tremendous power over the distribution, so they decide what consumers want to buy, what is put in front of the consumers and even pricing and distribution. We have online platforms like Netflix, which not only have become very powerful when it comes to content distribution, but they’re also now getting into content production. They have deep financial pockets and the ability to know their consumers because they have consumer-specific data. They know what people are watching, at what time, what they like, what they don’t like. They’re using that information in both creating the content and distributing the content.

Knowledge@Wharton: How do you think the traditional media that we’ve known for the last 40 or 50 years have handled this transition? They couldn’t take a lot of time to adjust to it because that meant lost revenue.

Telang: Let’s just take an example of Netflix. In the early periods and even now, Netflix to an extent relies on the content by the studios and the television networks. I think you see the evidence that sometimes there is a little bit of reluctance to provide that content to Netflix. But now that Netflix is getting into content production, the studios and traditional networks have to figure out a way to create and distribute content where the users have gotten used to nonlinear ways of watching the content. The days of prime-time slots, most of the younger generation, and probably a significant number of the older generation, aren’t watching content that way anymore. These guys have to figure out how they can create, generate and package the content and get on the platform to appeal and to cater to this new way of watching content.

Knowledge@Wharton: That’s part of the reason why these traditional outlets, especially TV networks, have felt the need to have a subscription service.

Telang: This is another challenge. If you look at the economics or the history of these online platforms, Netflix is not the only one. Fortunately or unfortunately, these markets tend to draw loyalty. That is, once they become a subscriber to Netflix, people are not very keen on then going to other platforms to consume the content. The challenge for these other players now is what platform they want to patronize that people are willing to actually go and pay attention and listen to. Otherwise you’re back to square one, where people are patronizing Netflix and how do I convert those people to come to me?

“Mobility essentially untethered people from the television set.”

Knowledge@Wharton: It really does start with the advent of the smartphone, doesn’t it?

Telang: Yes, because the mobility essentially untethered people from the television set. The internet made it possible, but still you were stuck to a chair, you still were looking at your desktop or even your laptop. Now mobile and the 3G and 4G networks and the technology that makes streaming on mobile so much more efficient absolutely give users an ability to stream content anytime, anywhere.

Knowledge@Wharton: It also has had an effect on how companies decide to advertise. There are certain events that happen within a TV network that still sell very well, such as the Super Bowl. But a lot of companies don’t think the traditional way of advertising is even close to the way they want to do it these days.

Telang: This again goes back to the nonlinear way people are watching TV. Even on a regular TV network, people are DVRing the shows, skipping the advertisements. How you support the content from your advertising revenue, which used to be the key business revenue earner, is going to be a challenge. Netflix has clearly gone into the subscription model where they don’t have to rely necessarily on the advertising money. But most of the TV networks are clearly dependent heavily on advertising money.

Knowledge@Wharton: We’ve talked about movies and television, but is it the same for the music and book publishing industry?

Telang: Totally. The Walkman came and the VCR came and the DVD players came, and they all disrupted the industry to an extent. But none of them became the vehicle as a direct competition. The companies were able to adapt themselves and actually started making more money. Once the VCR came, home entertainment really exploded and added to the revenues.

Knowledge@Wharton High School

What this new technology did, especially for music, is [enable] the proliferation of piracy, which had such a large impact that now I can’t sell my content at $14.99 like I was able to do 10 years ago. Now I need to come back and figure out how do I price; how do I distribute? Then Apple came in and iTunes started dominating and basically dictating the terms. Now I think the iTunes market is in decline but the streaming service has come in — the Spotifys of the world — which are basically the dominant way people listen today. How the labels and artists are making money is so different than 15 years ago. Fifteen years ago, CDs made the money and concerts were the way you advertise the CDs. Today, concerts make the money and CDs are a way to advertise concerts. It’s literally a 360-degree change.

Knowledge@Wharton: It shows why there are certain artists out there who are more willing to play a stadium tour because you can put 50,000 people in a football stadium, compared with 15,000 in an arena.

Telang: If you look at the music industry, the concerts and these tours are really where the artists are making money. But that also means that the traditional company’s leverage and power that they had is diminishing. In the old days, you needed to sign with a label because the label is the one who can promote you. The label is the one who’s going to put you in front of the radio. The label has all the distributional power. That power has diminished because new technology, new platforms have come in. Nowadays, you also see a lot of artists going independent, going solo, maybe going with the smaller independent labels. That’s really one of the shifts that’s happening. Whether it’s publishers or studios or labels, if you look at their 50-60 years of history, a few firms dominated. And the dominance came from all the power they had. They had scale to find artists and promote and distribute the artists. New platforms have come in. Piracy has come in. All that power has diminished.

“How you support the content from your advertising revenue, which used to be the key business revenue earner, is going to be a challenge.”

Knowledge@Wharton: It’s interesting that in this shifting dynamic of platforms, theaters are still the main platform in the film industry. You still have that reliance on companies that spend a lot of money to release big movies in the theaters.

Telang: Right. The most common way the content in the film industry always was distributed is what was called a sequential release. The movie will come in the theater, then go into home entertainment, then come on television. It’s the windowing strategy. You’re right, the model is still very much like what it was. The theaters are still dominating features. But if you look at over the last few years, the length of the window has been squeezing quite a bit.

Obviously, the movie industry wants to monetize the content as much as they can. Even if sometimes the studio wants maybe to release the content earlier on other channels, they feel resistance from the theater associations. I think maybe 10 years down the line, we are going to see a significant shift. Netflix is going to make movies and put the movie for streaming probably within no time.

Knowledge@Wharton: How important then are companies like Netflix and Amazon in the future of this industry?

Telang: The best example I can give is if you look at the way the traditional firms have operated, because of the lack of hard data they had and sometimes the lack of training to look at the data, many decisions were made on what we call a “gut feel” basis i.e., “This is likely to be successful. This artist is likely to succeed.” Then they promote that artist or that movie and hope it works….

You look at Amazon and the Netflix and the Googles of this world, they make data driven decisions. The executives at Amazon and Google say, “If you don’t have data to support your decision, I will not make that decision.” Everything is testing. Everything is data collection. They have a culture where the decision needs to be made based on hard data. Luckily, they have access to data. Amazon has millions of customers. Netflix has 80 million customers. They can look at their preferences. They can look at what people are watching, what they prefer, what they don’t prefer.

If you look at the traditional firms versus some of the new platforms, I think a fundamental difference is that the new platforms are going to data driven decision-making. This is how I’m going to price. This is how I’m going to distribute. This is how I will incorporate that into my content production. As I said in the book, it’s hard to say who’s going to be the winner. What we know is that the data driven decision-making is going to play an important role no matter who you are because that’s really where the market is going.

“Fifteen years ago, CDs made the money and concerts were the way you advertise the CDs. Today, concerts make the money and CDs are a way to advertise concerts.”

Knowledge@Wharton: Netflix took a gamble on the show House of Cards, and the fact that it was a success just reinforces that this is the way many entities within the TV industry have to go. It’s also changed the model of the TV show at the network level. Instead of a 22-episode season, they think of a 10-episode season where they put one show in the fall and one in the spring. You’re getting more content out there, but you’re also getting more data on what shows people like.

Telang: Right. We give an example in the book about how House of Cards actually came into being. It was pitched to various networks, including Netflix. It was a political drama. People in the traditional network were not sure whether a political drama would do really well. After TheWest Wing, there hasn’t been a whole lot of success.

Here comes Netflix with 30 million customers’ data and viewing habits in hand. They have information. How many people like Kevin Spacey? How many people like [director and House of Cards executive producer] David Fincher? How many like the combination? How many people are already renting the DVDs of the British drama from which House of Cards was derived? They felt very confident based on the information and the data they had that this was going to be highly likely to be successful. So they bid for it. Once they had it, they created six different trailers to appeal to different segments. Looking at the combination with all of the data driven decision-making, they were able to turn something into a very, very popular show.

Knowledge@Wharton: The example of the six trailers is something that a lot of movie theaters are starting to use. When the latest Star Wars film came out, they kept putting different trailers out there. Star Wars may be something that’s so big that mostly everybody enjoys it, but it’s the same philosophy.

Telang: Right. Except that Netflix can literally do one-on-one marketing. Theaters still have to rely on aggregate level. They can get some information about what demographic people are coming from, what location people are coming from.

Knowledge@Wharton: Will that change how the theaters in the future interact with people in the seat? Will there be more connectivity within the seat so they can get data when someone sits in the chair to watch a movie?

Telang: It is possible, but at some level the theatrical experience is still that everybody is watching the same thing versus a Netflix experience where you could be watching something else, I could be watching something else. You could stop after 10 minutes and I could still continue. You could do binge watching. All of those features that are so much part of a Netflix platform are not that easy to replicate.

Knowledge@Wharton: How has the blockbuster film changed because of this technology shift?

Telang: We had some conversation with some of the studios, including Legendary Entertainment. One of the big challenges the studios have is they spend millions of dollars in promotion, in television advertising, in reaching out to people. But when you don’t have very good information, you don’t have very good data, you just kind of blast everybody with a broadcast message, and some of it is not very effective.

Studios are trying to get more precise information about user and user preferences, then devise the promotional strategy that gives them a better return on their investment. I don’t know how much the production side is being affected by the data. It’s very unlikely that much is going on on that side. But you see some efforts being made where we can use promotion and distribution and advertising more effectively than what we have done in the past.

Knowledge@Wharton: Does that also impact the movie industry with making sequels?

Telang: I think somebody could argue that sequels tend to have less risk in the sense that you already have a loyal base who’s willing to watch. Maybe some of it is being driven by that, that you don’t want to make this $150 million investment. Some of it is also probably internationalization, that now movies make so much money outside of the U.S. that with the big sequels you probably don’t have to spend so much time creating awareness in China or India or Europe. That probably plays a role in creating content of that type.

“Data driven decision-making is going to play an important role no matter who you are because that’s really where the market is going.”

Knowledge@Wharton: How is this going to continue to develop? How are the traditional networks and movie studios going to adapt in the next decade or two?

Telang: Predicting the future is difficult. Michael and I have resisted doing that. What we know for sure is that the studios and TV networks and book publishers definitely have a tremendous advantage in creating interesting content. They have a lot of experience in doing that. Clearly, that’s their competitive advantage. Their challenge is that these distributors, the Amazons and the Netflixes, have become so powerful that it’s a competitive threat to them.

One way they could move forward, and they’re already trying, is to patronize multiple platforms so that their best bet would be that there are enough platforms competing with each other so there is demand for their content and they have some negotiating power. The other way would be to patronize some of their own platform. Not many people might know that Hulu, which is a reasonably successful streaming platform, is a consortium of studios. With the way decision-making is done at the studios, where everything is siloed and everything gets competed away, they really didn’t pay as much attention to the growth of that platform, which could have been and probably is a very viable competition to Netflix.

A lot of it is going to depend on how the market is going to evolve. If it happens that Netflix becomes the dominant player and has this enormous customer base and this enormous data on which they make all these decisions and do it very successfully, I think the traditional players are going to be at a severe competitive disadvantage. But we don’t know how this market is going to evolve. Maybe some mergers will take place. Technology shocks can some in so many different ways, so I think it’s a very fluid market. All we know is the way people consume content and the way the content is going to be served to the consumers has changed. Who can take advantage of that and who is going to be the winner remains to be seen, I think.

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